Deed of Trust vs. Contract for Deed

Neither a deed of trust or a contract for deed is a true deed. A deed is a document used to transfer title to real estate; deeds of trust and contracts for deeds are arrangements for buying land, each legally different from a mortgage. Both involve someone else holding title to the property until you've made all the payments on your loan.

When you buy a house with a deed of trust, your lender appoints a third party as a trustee. The trustee holds the title to the house until you've paid off your home loan. The trustee has no control or rights over your property, and in most ways this arrangement is identical to a mortgage. If you default, however, your lender can foreclose without a judge's approval by showing proof of default to the trustee, the Nolo legal website states.

If a lender has to go to court to foreclose, it can take up to a year, whereas nonjudicial foreclosures only take a few months. You can challenge a nonjudicial foreclosure in court, Nolo states, but you have to file the lawsuit. In some states, all lenders use deeds of trust instead of mortgages; in others, the lender can choose. The only benefit to homeowners is that if the foreclosure doesn't pay off the mortgage, a number of states prevent the lender from suing you for the rest of the money.

A contract for deed is a method for buying a home with seller financing, Phillip Kunkel states in a University of Minnesota report. Instead of taking out a mortgage, you sign a contract to make monthly payments on the property to the seller. You take possession of the property at once, but the seller holds on to the title until you've paid off your debt in full. As buyer, you probably have to assumes responsibility for paying real estate taxes and insurance premiums on the land.

If you can't qualify for a mortgage, a contract for deed may be a good alternative: If the seller is willing, you won't have to meet the same standards as an institutional lender. You may also save money, as you won't pay loan origination fees and other closing costs. If you default on the loan, however, the seller can take back the property without a foreclosure and you will lose all the money you've invested in it.